Oil soars but no reason to panic

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When oil hit $US50 a barrel in New York on Monday night there was a feeling that we should all panic, but no one did.

Economists worried a little, as they are wont to do, the Federal Government found a rainbow amid the dark clouds of high energy prices, and investors pushed Woodside shares to record levels.

Finance Minister Nick Minchin told us not to worry.

"Oil prices would have to be sustained at a high level for it to have any real impact," he said. "To the extent that it impacts on world economic growth, then that could cause difficulties for us from a growth point of view.

"But ... because we are a net energy exporter, Australia is peculiarly, I suppose, paradoxically, a net beneficiary of higher energy prices around the world. That's better for our current account deficit."

The stockmarket was taking a similar view, with Woodside shares jumping 8c to a record $19.83 and the ASX Energy sub-index rising 0.4 per cent to 6476.

Times are good for oil producers: low hedging levels mean record oil prices flow pretty much straight through to the bottom line.

Woodside, for example, is only 1 per cent hedged and each $US1 rise in the oil price means an extra $16 million in earnings.

Oilsearch ($1.43) and Santos ($7.30) also finished within a whisper of recent highs while two small explorers, AWE ($1.78) and Oilex (92c), closed off 1c and 2c respectively.

Oilex's recent discoveries in the Surat Basin in Queensland have pushed its shares up from 16c in early September to a high of $1.07 a few days ago.

Oil prices have risen 60 per cent in the past year and the energy sub-index is up 45 per cent.

Woodside has risen 51 per cent, mainly on the oil price with some influence from its Mauritanian discoveries. Its partner in Mauritania, Hardman Resources, has rocketed 262 per cent to $2.21 because, as one analyst said, "a prospective discovery of 200 million barrels means a lot more to a $1.5 billion company than to a $14 billion company".

Oilsearch, a company of similar size to Hardman, with mature reserves in Papua New Guinea, is up 52 per cent from its November low, purely on the basis of the value of its oil in the ground.

The question for investors is whether the sector has become overvalued. No, say the analysts, if you factor in an oil price of $US40 for the next two years.

The only trouble is that most do not. Adam Conigliaro, an analyst with Perth broker DJ Carmichael, said he had factored in an average price of about $US34 for next year, though this may be revised upwards. Some other analysts expect prices to average $US28 by the end of 2005.

But no one is expecting a quick decline, with supply worries caused by Iraq, hurricanes in the Gulf of Mexico, and now unrest in Nigeria.